Gold is a hedge against inflationary monetary policy. So why isn’t it soaring anymore? Maybe it isn’t doing so because the ultra-easy monetary policies of the major central banks haven’t boosted inflation. Instead, they’ve become increasingly concerned about the prospects of deflation, especially at the European Central Bank (ECB) and the Bank of Japan (BOJ). At the Fed, the worry must be that the ECB and BOJ are exporting their deflation to the US by pursuing policies that are weakening their currencies. A strong dollar hasn’t historically been good for gold.
I’ve previously explained why ultra-easy monetary policy might be deflationary rather than inflationary. In brief, it might stimulate supply more than demand. In the past, easy money stimulated demand more than supply as borrowers borrowed lots of money and spent it all. Now their debt burdens are such that many may be maxed out. Meanwhile, suppliers have taken advantage of easy money to expand their capacity, assuming that “if you build, they will come.” That’s been a bad assumption for a lot of producers, especially of commodities.
Gold also tends to reflect the underlying trend in commodity prices, including the price of crude oil. Their trends have been mostly flat since 2011, and down more recently.
Today's Morning Briefing: More Relief. (1) Recalling the causes of October’s panic attack. (2) Where are we now? (3) Cocoa price as an Ebola thermometer. (4) Reversal of futures: Distant crude oil prices exceeding nearby ones. (5) QE termination anxiety in US dissipated by more of it from ECB and BOJ. (6) Eurozone economy crawling along. (7) Chinese curse: Prolonged soft landing. (8) Falling oil prices depress Energy earnings, but boost Transportation earnings. (9) US consumers have the will and means to spend. (10) Crude oil plunge yields winners and losers. (11) Evil doers in Russia and Iran among the losers.
